An Overview of Exceptions to Moratorium under the Insolvency And Bankruptcy Code

[Radhika Malpani is a 3rd year B.B.A., LL.B student at National Law University, Jodhpur]

With the enactment of the Insolvency and Bankruptcy Code, 2016, (“Code”) a unified framework to deal with insolvency has been set in place. Previously, insolvency was dealt under multiple statutes and scattered provisions embedded with numerous complexities. With the introduction of the Code, the liquidation and the winding-up procedures have been simplified and a proper time frame has been put in place. One such provision is Section 14 of the Code. It reads as follows:

1) …, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:-

(a) the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

With this section, there has been an explicit bar introduced by the legislature on the institution of suits or proceedings against the corporate debtor. At first blush, it may appear that there is a blanket restriction on the institution of suits or proceedings. However, this is not so and there are certain exceptions to this imposition of moratorium. Some of the exceptions have been acknowledged and approved by the tribunals and the courts and some have been rejected while giving reasons which may be subject to criticism.

Exceptions

Proceedings under Section 138 of the Negotiable Instruments Act.

Section 138 of the Negotiable Instruments Act (“NI Act”) deals with cheque bouncing; if an amount falls due in this respect, the same can be recovered by filing a complaint under this provision. The National Company Law Appellate Tribunal (“NCLAT”), in Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj & Ors., held that a moratorium would not be extended to proceedings filed under the NI Act. The reasoning adopted by the NCLAT was that the proceedings under the NI Act are criminal in nature and that section 138 is a penal provision. The NCLAT took the view that the action taken under the section is not a proceeding or a judgment or a decree of a money claim.

However, there is a differing view taken by the Supreme Court on the question of the nature of the proceedings under section 138. In Damodar S. Prabhu v. Sayed Babalal, it was held that section 138 is actually in the nature of a civil wrong which has been given criminal implications. This is because the interest of the complainant is the recovery of the money and not sending the accused behind bars. Moreover, in M/s Meters and Instruments Pvt. Ltd. & Anr. v. Kanchan Mehta, the Supreme Court observed that the offence under section 138 is primarily a civil wrong and the purpose of the provision is predominantly compensatory. The penal element is mainly for the purposes of enforcing the compensatory element.

The NCLAT failed to acknowledge the observations made by the Supreme Court on the nature of the proceedings initiated under the NI Act. Therefore, by allowing the initiation of action under section 138 of the NI Act, which is nothing but a proceeding for the recovery of money, the entire purpose of the Code will be defeated.

Proceedings under Articles 32 and 136 of the Constitution of India

An exception was created by the National Company Law Tribunal (“NCLT”) in Canara Bank v. Deccan Chronicle Holdings Limited. It held that the imposition of the moratorium will not restrict any proceedings to be initiated or pending before the Supreme Court under Article 32 or Article 136 of the Constitution of India wherein an order is passed. Moreover, the power of any High Court under Article 226 of the Constitution of India will not be affected by such imposition of a moratorium.

In Power Grid Corporation of India Limited v. Jyoti Structures Limited, a case was initiated under section 34 of the Arbitration Act to set aside the arbitral award which was passed in the favour of the corporate debtor. The nature of the arbitral award was that of a pure money decree. When the proceedings were pending, an application for the insolvency of the corporate debtor was filed and a moratorium was imposed under section 14. The question before the Court was whether, after the imposition of the moratorium, the arbitral proceedings ought to be stayed or not.

The Court held that the term ‘proceedings’ mentioned in section 14 is limited to the debt recovery actions against the assets of the corporate debtor and not any type of proceedings. Moreover, there is no burden created on the assets of the corporate debtor when the proceedings are continued. Hence, there is no bar on such proceedings under the moratorium provision. Moreover, a distinction is made between usage of the term ‘against the corporate debtor’ in section 14(1)(a) of the Code in comparison with ‘by or against the corporate debtor’ in section 33(5). It makes it clear that the latter encompasses a wider meaning.

Furthermore, only the enforceability of the arbitral award is subjected to the moratorium provision and not the proceedings, execution of the award and the objections. Subsequently, the proceedings can be continued by the interim resolution professional.

Arbitral Proceedings against the Corporate Debtor

In Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan Private Limited, the Supreme Court held that there cannot be an institution or continuance of arbitration proceedings against the corporate debtor when a moratorium is imposed under section 14 of the Code. However, commentators have criticized this view. They take the stance that the word ‘proceedings’ is not inclusive of arbitration proceedings. The reasoning is that the legislature is well aware and has itself made a distinction between the two terms under section 5(6) of the Code wherein it uses ‘a suit or arbitral proceedings’ and clarifies that both signify different meanings. Moreover, the legislature was mindful enough to include arbitration proceedings separately or along with the mention of ‘suits’ or of ‘other proceedings’. If it so intended to provide for arbitration proceedings being subject to section 14, it could have explicitly stated the same, as it did in the other provisions. While this viewpoint may be recognised, the judgment from the Supreme Court currently holds the field.

A Suit against the Personal Guarantor of a Corporate Debtor

The controversy regarding the suit against a personal guarantor was put to rest after the decision of the Supreme Court in State Bank of India v. V. Ramakrishnan. Here, a director of the corporate debtor was acting as the personal guarantor of the company. When the corporate debtor entered insolvency proceedings and moratorium was imposed on it, he approached the NCLT for extension of the moratorium on the suit against him as well. The NCLT allowed such a stay by adopting a premise that under section 31 of the Code a personal guarantor would also be bound by the resolution plan. The same reasoning was upheld by the NCLAT. However, the Supreme Court struck down such stay on the proceedings against the guarantor and stated:

‘Section 14 refers only to debts due by Corporate Debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them.’

The reasoning taken by the Court was based on the premise that the corporate debtor has a separate legal existence than its personal guarantors, and the fact of its insolvency would not imply that the guarantor is going through the same. The Court took the view that the case proceeded against the personal guarantors would continue to be governed by the previous Presidency-Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 and not the Code. This is because the relevant provisions under section 243 of the Code have not been brought into force. Also, under section 60 of the Code, it is mentioned that the territorial jurisdiction of the insolvency proceedings would be at the place where the registered office of the corporate debtor is located. There, both the personal guarantors and the corporate debtors are governed by two different laws. Moreover, the Court stated that section 31, instead of supporting the claim of the personal guarantors, is inclined more towards the non-application of the moratorium as they can be called to pay the debts due.

The Court also delved into the question of the contrast between sections 96 and 101 of the Code on the one hand and section 14 on the other. Sections 96 and 101 form an element of Part III of the Code and talk about the moratorium imposed on the personal guarantors on whom the insolvency resolution process may be initiated separately. The Court stated that the former has a wide ambit as it deals with the debtor and not only concerns itself with the debt. Whereas in the latter, a moratorium can be imposed only in respect of the debt and not the debtor.

Conclusion

The provision of moratorium was indeed inserted in order to prevent the institution or continuation of suits against the corporate debtor during the resolution process. However, seeing the magnitude of the suits being allowed even after the imposition of the moratorium, has the purpose being kept intact? Is the underlying objective of section 14 not at stake if such a trend of allowing a wide range of proceedings continues? By allowing provisions of moratorium not to be imposed on proceedings under section 138 of the NI Act even though they have been considered by the Supreme Court as primarily of civil nature is something which goes against the very purpose for which the provision was incorporated. Therefore, there has to be a proper reconsideration of this position regarding the scope of the exceptions to the moratorium under the Code.

The opinions expressed herein are those of the contributors (which shall, for these purposes, include guests) in their personal capacity and do not, in any way or manner, reflect the views of the organizations that the contributors are presently associated with, or that have previously employed or retained the contributors. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

Many of the links on this blog will take you to sites operated by third parties. The contributors of this blog have not reviewed all of the information on these sites or the accuracy or reliability of any information, data, opinions, advice, or statements on these sites. The contributors do not endorse these sites, or opinions they may offer. These third-party links are offered solely for the purpose of discussion and thinking on Indian corporate law and other related topics. It is also possible that some of the pages linked may become inactive after the lapse of a period of time.